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Australian dairy 'offers best risk returns in global agriculture'

Australian dairy currently offers the highest risk-adjusted return of any sector in global agriculture, according to Aquila Capital.

Surging global demand, especially from Australia’s regional neighbours in southeast and eastern Asia, means Australian dairy now offers internal rates of return of between 11-16% per annum.

The Australia Bureau of Agriculture and Resource Economics and Sciences forecasts that milk prices will at least remain unchanged over the next four years at 50 Australian cents per litre, but could head up to 52.5 cents per litre between 2018/2019.

In a scenario of this kind, investors in Australian dairy farms can expect to generate higher returns, with an Internal Rate of Return (IRR) of up to 16 percent p.a. possible. Even if milk prices were at the conservative estimate of 41.5 Australian cents, Australian dairy farms could generate an IRR of 11% from recapitalization and farm improvements, says Detlef Schoen, Group Head of Farm Investments at Aquila Capital.

Detlef Schoen commented: “The acceleration in demand has already caused the spread between supply and demand for dairy products to widen in recent years and this development is expected to continue. The OECD forecasts growth rates for milk and dairy products from emerging markets of between 1.6%-2.8%,1 which might lead to a potential demand overhang for dairy products of as much as five billion litres by 2020.

“Australia is very well placed to benefit from the increasing demand, exporting 50% of its domestically-produced dairy products.”

Dairy Australia, the national services body for the dairy industry expects production of all domestic dairy products to climb up to 2% in the 2013/14 season to more than nine million tons.